Chapter 12/16

Front 1

In a well-designed internal control system, employees in the same department most likely would approve purchase orders, and also

Back 1

Negotiate terms with vendors.

Front 2

In a well-designed internal control system, the same employee may be permitted to

Back 2

Mail signed checks and also cancel supporting documents.

Front 3

Which of the following internal control activities is not usually performed in the vouchers payable department?

Back 3

Accounting for unused prenumbered purchase orders and receiving reports.

Front 4

Operating control of the check-signing machine normally should be the responsibility of the

Back 4

Treasury function.

Front 5

In assessing risks of material misstatement for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Back 5

Occurrence.

Front 6

Effective controls relevant to purchasing of raw materials should usually include all of the following except

Back 6

Obtaining third-party written quality and quantity reports prior to payment for the raw materials.

Front 7

Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company's controls that protect against the purchase of

Back 7

Supplies individually ordered, without considering possible volume discounts.

Front 8

Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to

Back 8

The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand.

Front 9

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? Select and examine

Back 9

Canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Front 10

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if

Back 10

Partial payments to vendors are continuously made in the ordinary course of business.

Front 11

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Back 11

Are direct borrowings on notes payable authorized by the board of directors?

Front 12

Which of the following is a standard control over cash disbursements?

Back 12

checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Front 13

Under which of the following circumstances would an auditor be most likely to intensify an audit of a $500 imprest petty cash fund?

Back 13

Reimbursement occurs twice each week.

Front 14

Which of the following control activities is not usually performed with regard to vouchers payable in the accounting department?

Back 14

Controlling the mailing of the check and remittance advice.

Front 15

Which of the following internal control activities most likely would be used to maintain accurate inventory records?

Back 15

Periodic inventory counts are used to adjust the perpetual inventory records.

Front 16

In the accounting system of Apogee Company, the quantities counted by the receiving department and entered at a terminal are transmitted to the computer, which immediately transmits the amounts back to the terminal for display on the terminal screen. This display enables the operator to

Back 16

Verify that the amount was entered accurately.

Front 17

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Back 17

Reduction of the frequency of data entry errors.

Front 18

Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) environment?

Back 18

A compressed business cycle with lower year-end receivables balances.

Front 19

Which of the following statements is true concerning the security of messages in an electronic data interchange (EDI) system?

Back 19

Encryption performed by physically secure hardware devices is more secure than encryption performed by software.

Front 20

Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system?

Back 20

Network and sender-recipient acknowledgments.

Front 21

Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?

Back 21

Preventive controls generally are more important than detective controls in EDI systems.

Front 22

Which of the following internal control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Back 22

The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

Front 23

When an entity uses a trust company as custodian of its trading securities, the possibility of concealing fraud most likely will be reduced if the

Back 23

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Front 24

Which control is most likely to give the greatest assurance that securities held as investments are safeguarded?

Back 24

Access to securities requires the signatures and presence of two designated officials.

Front 25

Apex Manufacturing Corporation mass produces eight different products. The controller who is interested in strengthening internal control over the accounting for materials used in production is most likely to implement a(n)

Back 25

Perpetual inventory system.

Front 26

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that

Back 26

Custody of work-in-process and of finished goods is properly maintained.

Front 27

For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count, and downward adjustments of the inventory account have been required. Contributing to the inventory problem could be material weaknesses in internal control that led to the failure to record some

Back 27

Purchases returned to vendors.

Front 28

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

Back 28

Are procedures in place to monitor and properly restrict access to equipment?

Front 29

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for

Back 29

Investigation of variances within a formal budgeting system.

Front 30

Which of the following is an internal control weakness related to factory equipment?

Back 30

All purchases of factory equipment are required to be made by the department in need of the equipment.

Front 31

Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions?

Back 31

Periodic physical inspection of plant and equipment by the internal audit staff.

Front 32

Which of the following activities is most likely to prevent the improper disposition of equipment?

Back 32

A segregation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

Front 33

Which of the following controls will most likely allow for a reduction in the scope of the auditor's tests of depreciation expense?

Back 33

Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.

Front 34

In auditing accounts payable, an auditor's procedures most likely will focus primarily on the relevant assertion about

Back 34

Completeness.

Front 35

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all

Back 35

Vendors' invoices.

Front 36

Which of the following procedures is least likely to be performed before the balance sheet date?

Back 36

Search for unrecorded liabilities.

Front 37

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Back 37

Examining vendor statements for amounts not reported as purchases.

Front 38

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is

Back 38

Vendors with whom the entity has previously done business.

Front 39

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable?

Back 39

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

Front 40

When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the

Back 40

Quality.

Front 41

Which of the following procedures would best detect a liability omission by management?

Back 41

Review purchase contracts and other legal documents.

Front 42

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

Back 42

Unpaid bills.

Front 43

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Back 43

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Front 44

When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?

Back 44

Inspection of receiving and issuing procedures.

Front 45

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the purchase

Back 45

Invoices.

Front 46

which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client's employees?

Back 46

Prepare a schedule of accounts payable.

Front 47

When auditing inventories, an auditor would least likely verify that

Back 47

All inventory owned by the client is on hand at the time of the count.

Front 48

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Back 48

Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Front 49

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of

Back 49

Classification and understandability.

Front 50

An auditor selected items for test counts while observing a clients's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about

Back 50

Completeness.

Front 51

A client maintains perpetual inventory records in both quantities and dollars. If the assessment of the risks of material misstatement is high, an auditor will probably

Back 51

Request the client to schedule the physical inventory count at the end of the year.

Front 52

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventroy count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

Back 52

Perpetual inventory records are maintained.

Front 53

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

Back 53

Purchases.

Front 54

When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily

Back 54

Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.

Front 55

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items

Back 55

Represented by inventory tags are included in the listing.

Front 56

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

Back 56

Credit memos for several items returned by customers had not been recorded.

Front 57

An auditor would be most likely to learn of slow-moving inventory through

Back 57

Review of perpetual inventory records.

Front 58

Which of the following procedures will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

Back 58

Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the validity of the perpetual inventory record.

Front 59

Purchase cutoff procedures should be designed to test whether all inventory

Back 59

Purchased and whose title has passed before year end was recorded.

Front 60

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year end was not recorded as a

Back 60

Sale in the current period.

Front 61

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest to the auditor that the client's goods have been shipped on consignment?

Back 61

Large debits to accounts receivable and small periodic credits.

Front 62

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the relevant assertions regarding inventory, including presentation and disclosure and

Back 62

Valuation and allocation.

Front 63

An auditor concludes that the omission of a substantive procedure considered necessary at the time of the audit may impair the auditor's current ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if

Back 63

The results of other procedures that were applied tend to compensate for the procedure omitted.

Front 64

On March 15, Year 2, Kent, CPA, expressed an unmodified opinion on a client's audited financial statements for the year ended December 31, Year 1. On May 4, Year 2, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unmodified opinion. If the shareholders are currently relying on the opinion, Kent should first

Back 64

Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion.

Front 65

A secondary result of the auditor's understanding of internal control for a nonissuer is that the understanding may

Back 65

Bring to the auditor's attention possible control conditions required to be communicated to the client.

Front 66

When communicating significant deficiencies in internal control noted in a financial statement audit of a nonissuer, the communication should indicate that

Back 66

The purpose of the audit was to report on the financial statements, not to provide assurance on internal control.

Front 67

Which of the following statements about an auditor's communication of internal control related matters identified in an audit of a nonissuer is true?

Back 67

The auditor should communicate significant internal control related matters no later than 60 days after the report release date.

Front 68

Under the AICPA's auditing standards, which of the following statements about an auditor's communication of significant control deficiencies is true?

Back 68

An auditor's report on significant control deficiencies should include a restriction on the use of the report.

Front 69

Which of the following representations should not be included in a written report on internal control related matters identified in an audit under the AICPA's auditing standards?

Back 69

There are no significant deficiencies or material weaknesses in the design or operation of internal control.

Front 70

Which of the following matters is an auditor required to communicate to those in the entity charged with governance?

Back 70

Both I and II:

I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved

II. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance

Front 71

Which of the following matters will an auditor most likely communicate to those charged with governance?

Back 71

The effects of significant accounting policies adopted by management in emerging areas for which no authoritative guidance exists.

Front 72

Which of the following matters should an auditor communicate to those charged with governance?

Back 72

The process used by management in formulating sensitive accounting estimates.

Front 73

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Back 73

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

Front 74

An auditor should communicate misstatements to those charged with governance

Back 74

If they are uncorrected.

Front 75

In an audit engagement, should an auditor communicate the following matters to those charged with governance?

Back 75

Auditor's Judgments About the Quality of the Client's Accounting Principles = Yes

Issues Discussed with Management Prior to the Auditor's Retention = Yes

Front 76

An auditor is most likely to communicate to those charged with governance that

Back 76

The auditor encountered significant difficulties during the audit.

Front 77

The primary reason an auditor requests letters of inquiry be sent to a client's legal counsel is to provide the auditor with

Back 77

Corroboration of the information furnished by management about litigation, claims and assessments.

Front 78

Which of the following is not an audit procedure that the auditor performs with respect to litigation, claims, and assessments?

Back 78

Confirm directly with the client's legal counsel that all claims have been recorded in the financial statements.

Front 79

The primary source of information to be reported about litigation, claims, and assessments is the

Back 79

Client's management.

Front 80

The letter of audit inquiry addressed to the client's external legal counsel will not ordinarily be

Back 80

Limited to references concerning only pending or threatened litigation in connection with which the legal counsel has been engaged.

Front 81

Legal counsel's response to an auditor's inquiry about litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties may reach an understanding on the limits of materiality for this purpose that are stated in the letter of inquiry?

Back 81

The auditor and the client's management.

Front 82

A CPA has received legal counsel's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's legal counsel shortly after receipt of the letter should alert the auditor that

Back 82

Undisclosed unasserted claims may have arisen.

Front 83

Which of the following statements about litigation, claims, and assessments extracted from a letter from a client's legal counsel is most likely to cause the auditor to request clarification?

Back 83

"I believe that the action can be settled for less than the damages claimed."

Front 84

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in legal counsel's response tothe auditor's letter of inquiry?

Back 84

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

Front 85

The refusal of a client's legal counsel to provide a representation on the legality of a particular act committed by the client is ordinarily

Back 85

Considered to be a scope limitation.

Front 86

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Back 86

Inquiring as to whether any unusual adjustments were made after year end.

Front 87

An auditor is concerned with completing various phases of the audit after the balance sheet date. This subsequent period extends to the date of the

Back 87

Auditor's report.

Front 88

A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should

Back 88

Advise management to disclose the event in notes to the financial statements.

Front 89

Which of the following procedures should an auditor ordinarily perform regarding subsequent events?

Back 89

Read the latest subsequent interim financial statements.

Front 90

Subsequent events are defined as events that occur subsequent to the

Back 90

Balance sheet date but prior to the auditor's report date.

Front 91

Zero Corp. suffered a loss having a material effect on its financial statements as a result of a customer's bankruptcy that rendered a trade receivable uncollectible. This bankruptcy occurred suddenly because of a natural disaster 10 days after Zero's balance sheet date but 1 month before the issuance of the financial statements and the auditor's report. Under these circumstances, the

Back 91

Financial Statements Should Be Adjusted = No

Event Requires Financial Statement Disclosure, but No Adjustment = Yes

Auditor's Report Should Be Modified for a Lack of Consistency = No

Front 92

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Back 92

Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end.

Front 93

Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under audit because such events typically represent the

Back 93

Culmination of conditions that existed at the balance sheet date.

Front 94

Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco's December 31, Year 1, financial statements on March 6, Year 2, the date of the auditor's report. A subsequently discovered fact requiring revision of the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson's attention on April 24, Year 2. If the fact became known prior to the report release date. and the revision is made, Wilson's report ordinarily should be dated

Back 94

Using dual dating.

Front 95

Which of the following material events occurring subsequent to the December 31, Year 1, balance sheet date will not ordinarily result in an adjustment of the financial statements before they are issued on March 2, Year 2?

Back 95

Acquisition of a subsidiary on January 23, Year 2. Negotiations had begun in December of Year 1.

Front 96

After the date of the report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless

Back 96

Information, which existed at the report date and may affect the report, comes to the auditor's attention.

Front 97

Under which of the following circumstances may audited financial statements contain a note that is labeled "unaudited," disclosing an event occurring after the balance sheet date?

Back 97

When the event occurs after the date of the auditor's original report.

Front 98

Which of the following events occurring after the date of the report most likely will cause the auditor to make further inquiries about the previously issued financial statements?

Back 98

The discovery of information regarding a contingency that existed before the financial statements were issued.

Front 99

When a contingency is resolved immediately subsequent to the issuance of financial statements with a report that included a paragraph emphasizing the contingency, the auditor should

Back 99

Take no action regarding the event.

Front 100

Soon after Boyd's audit report was released, Boyd learned of certain related party transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the financial statement. Boyd should

Back 100

Discuss the matter with management.

Front 101

The auditor learned of the following situations after issuing the audit report on February 6. Each is important to users of the financial statements. For which one does the auditor have responsibility for disclosure of the newly discovered facts?

Back 101

A conflict of interest involving credit officers and a principal company supplier that existed during the audit year was discovered on March 3.

Front 102

Subsequent to the date of the auditor's report, the auditor became aware of fact existing at the report date that would have affected the report had the auditor then been aware of such facts. The auditor should

Back 102

Determine whether the financial statements need revision.

Front 103

After an audit report containing an unmodified opinion on a nonissuer's financial statements was dated and the financial statements issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should

Back 103

Take no action because the auditor has no obligation to make any further inquiries.

Front 104

On February 25, financial statements were released with an auditor's report expressing an unmodified opinion on the statements for the year ended January 31. On March 2, the CPA learned that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that creditors are currently relying on the financial statements. The CPA's next course of action most likely is to

Back 104

Notify management and those charged with governance that the auditor will seek to prevent future reliance on the auditor's report.

Front 105

For which of the following matters should an auditor obtain written management representations?

Back 105

Management's knowledge of allegations of fraud or suspected fraud affecting the entity.

Front 106

A purpose of a management representation letter is to reduce

Back 106

The possibility of a misunderstanding concerning management's responsibility for the financial statements.

Front 107

When an audit is made in accordance with auditing standards, the auditor should always

Back 107

Obtain certain written representations from management.

Front 108

Which of the following matters will an auditor most likely include in a management representation letter?

Back 108

Management's acknowledgment of its responsibility to detect employee fraud.

Front 109

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations

Back 109

Complement, but do not replace, substantive procedures designed to support the assertion.

Front 110

To which of the following matters would an auditor not apply materiality limits when obtaining specific written management representations?

Back 110

Fraud involving employees with significant roles in internal control.

Front 111

Key Co. plans to present comparative financial statements for the years ended December 31, Year 1 and Year 2, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, Year 3. Key's current management team was not present until January 1, Year 2. What period of time should be covered by Key's management representation letter?

Back 111

January 1, Year 1, through May 1, Year 3.

Front 112

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggreagate. Which of the following actions by the auditor is most appropriate?

Back 112

Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material.

Front 113

A written management representation letter is most likely to be an auditor's best source of corroborative information of a client's intention to

Back 113

Discontinue a line of business

Front 114

A written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

Back 114

Chief executive officer and the chief financial officer.

Front 115

If management refuses to provide certain written representations that the auditor believes are essential, which of the following is appropriate?

Back 115

The client's refusal may have an effect on the auditor's ability to rely on other representations of management.

Front 116

An auditor should obtain written representations from management about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by

Back 116

Management and the auditor.

Front 117

Which of the following conditions or vents is most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Back 117

Cash flows from operating activities are negative.

Front 118

An auditor believes that there is substantial doubt about an entity's ability to continue as a goin concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Back 118

Extend the due dates of existing loans.